Corning's (GLW) Management Presents at Citi Global Technology Conference (Transcript)

Sep. 3.14 | About: Corning Inc. (GLW)

Corning Incorporated (NYSE:GLW)

Citi Global Technology Conference Call

September 3, 2014 08:00 ET

Executives

Eric Musser - Executive Vice President, Corning Technologies and International

Jim Flaws - Chief Financial Officer

Analysts

Ehud Gelblum - Citi

Ehud Gelblum - Citi

Welcome to the second day of the Citi Global Tech Conference. My name is Ehud Gelblum. I cover data networking and telecom equipment. And my guest today joined Corning in 1986, which makes him a virtual newcomer compared to the rest of management team. I checked online, Wendell, Jim, Marty Curran, and even Jim Clappin all predate you. So, you still have a couple of more years before you can start using the executive bathroom I think, but he most recently ran the Greater China business, where most of the world’s TV demand growth is coming from before being promoted to an all of international two years ago as EVP, Corning Technologies and International. My guest oversees Corning’s environmental technologies and life sciences business as well as international and the global manufacturing and quality organizations. I am pleased to welcome Eric Musser to the Citi Global Tech Conference for the first time. Eric, thank you for joining us.

With him, I am also pleased to introduce Jim Flaws, CFO of Corning and a multiple return friend of the conference. Jim got to Corning in 1973 straight I believe at a fourth grade and has been CFO ever since. At Corning’s Analyst Day earlier this year, Jim stated that as the company was celebrating over 160 years in existence, they were planning for the next 160 years and didn’t have the balance sheet to get there and the financial planning. And I actually asked Jim, you can check in the transcript, it’s true with the intent to actually remain CFO of Corning for all 160 of those next years and he responded of that missing a beat that, that was exactly the plan and that he intended to actually get his brain downloaded into a chip, so that he could continue to be CFO of the company for all 160 years. So, Jim, I am glad that actually you are live with us today here and not in the chip yet. And with that, I think we will begin. Eric has some opening slides that he will walk us through and then we will get to a Q&A. Thank you very much.

Eric Musser

Okay, thanks. Thank you, Huddy and good morning everyone and I appreciate your interest today in attending Corning’s presentation. As Huddy indicated, I am Eric Musser, Executive Vice President of Corning Technologies and International.

Before I begin, please be advised that my presentation contains forward-looking statements which are based on current expectations, so actual results may differ materially from what I share today. Corning Incorporated was founded 163 years ago and is one of the world’s leading innovators in material science and Corning is a global leader in the five vital market segments that I show here on the bottom of the slide. And today, I will be discussing the two businesses that I am responsible for, which at first may seem quite unrelated to you, but in fact they share a common goal and that is enabling healthier lives worldwide, whether that means enabling cleaner air or enabling the creation of new and more effective medicines, we at Corning are committed to continue our decades long heritage of producing life changing innovations for these growing markets.

Let’s begin with a look at our environmental technologies business. Our ceramic substrates and diesel filters have been the foundation of world-class pollution control systems since we invented the first cellular ceramic solution 40 years ago now and our products can be found cleaning emissions from both gas and diesel-powered vehicles and from power generation plants. We like the environmental business for several reasons. First, this technology is one of our most important life-changing innovations. It has literally improved the life of everyone here in this room today as well as billions of people around the world. And second because clean air is the universal need. There are significant growth opportunities now and into the future in emerging markets. Third, because regulators the world over continued to tighten standards, we have the opportunity continue innovating and deliver more advanced materials at ever higher levels of performance.

And I would like to shift now to focus on three promising opportunities for growth. New heavy duty regulations in Europe became mandatory last month and new regulations in China took effect last July. In China full compliance may take some time, but we are already seeing enforcement intensify this year. We have a proven suite of advanced substrates and filters including specialized regional products and a capacity plan to meet this project demand growth. Order rates in both of these regions are ramping up, which is reflected in our performance year-to-date.

In light duty, new U.S. regulations will require an additional 75% drop in mobile emissions beginning in 2016. So for gasoline engines about 70% of total emissions can occur actually during the first 30 seconds after engine start and these so called cold start emissions then are key to meeting this new standard. Our breakthrough floral material allows the system to heat up and start cleaning faster. It improves fuel efficiency and it can lower overall system cost by reducing the amount of precious metal consumption by our customers. We expect to secure premium pricing for this product and to begin wining platforms this year.

Also with light duty drivers like us want better fuel economy and higher engine performance, many OEMs are planning to achieve this by utilization of gasoline direct injection technology called GDI. But the trade off for GDI performance is the high numbers of particular and this is going to require a filter solution to address. So we believe that starting in Europe a market will emerge for these new filters and we are developing a highly effective gasoline particular filter with major automakers. Working on that now and we expect to win platforms again this year.

In summary, we like our position in environmental. Although sales in the past two years were impacted by both the European recession and a decline in heavy duty builds in North America, we are now seeing improvement in both of these markets resulting in strong demand and growing revenues. And our earnings are growing faster than sales as we have focused on manufacturing improvements and other cost reduction efforts to improve profitability. We expect these programs to continue delivering very attractive incremental margins allowing us to produce double digit earnings growth.

Now I would like to turn our attention to life sciences. We have been a leading supplier of life science tools for nearly 100 years and we believe our technologies will continue to help advance the industry’s goal of more affordable and more effective medicines. And as that growth is realized we will continue to generate solid returns for Corning. We like life sciences for several reasons. First our revenues are expanding as we realize the synergies from strategic acquisitions. Second, the base business can deliver steady growth and we have been growing faster than our competition. And then finally there are tough customer problems to solve in the area of large scale cell culture. Corning pioneered research cell culture and we are using that knowledge and experience now to enter the area of larger scale production cell culture.

I think as you might know the pharma industry is undergoing a major shift from chemically to biologically derived drugs and therapies and we like this trend, because more biologic drugs means a need for more cell culture and we have been an innovator in this area and we have remained a market leader. With the addition of the Discovery Labware products to our portfolio, our offering has grown even stronger and we are now developing and launching products to serve the drug maker, not only in research, but also into bio-processing.

So, let’s look at some of the products that will make a difference. As biotech drugs take off, our customers need new ways to dramatically increase cell production. Our HYPER series of breathable cell culture vessels enables customers to use their current incubator space with much greater output thereby saving on both capital and operating costs. Corning has already claimed a leading position in this emerging market with sales of these vessels growing about 15% annually. Another way to increase cell production is free floating cell culture, where cells are placed in large vats of liquid and they are grown in solution, but many important cell lines cannot survive without a surface to grow on in solution. Our micro-carrier beads addressed this issue by enabling the growth of large numbers of attachment cells in a solution and Corning’s unique coatings and surfaces further enhance the performance of our beads.

Finally, cells require nutrients to grow, which are provided both by the cell growth surface and through liquid media, both are often derived from animals. But when cells or cell components are intended to be the drug, their risk associated with animal derived materials and these are a real concern. So, our synthetic coatings and serum free media enable the move to animal free cell culture without compromising performance. We expect with innovative media products like these combined with Corning’s strength in cell culture to continue to grow our position in this $1 billion market.

So, you can see why we like this business? With our focus on higher growth opportunities like bio-processing, along with new innovations and selective acquisitions, our sales and profit growth will continue to outpace the industry we serve. And similar to the environmental business, we have manufacturing programs in place to lower costs and enhance gross margins. So, we believe that our life science business will continue to deliver double-digit profit growth.

In summary then, both environmental technologies and life sciences are attractive businesses. With unique technologies and products, both are leaders in markets that are growing and both have important opportunities to solve tough customer challenges. As a result, we expect to see both of these businesses grow their sales and to deliver double-digit profit growth for Corning. Thank you.

Question-and-Answer Session

Ehud Gelblum - Citi

Excellent. Thank you, Eric. So, we will hit on those topics when I hit on couple of the other businesses at Corning as well. We will start with glass, because that seems to be top of gold of most of those mines and we will definitely hit on environmental and life sciences as well some great topics to dig into there. Let’s start with glass and let’s start with TVs and what sell-throughs look like? Clearly, earlier this year, the World Cup created an initial buildup in demand and we saw some strong strength especially out of Brazil ahead of the World Cup, TV retail sales seemed to have grown about 15% year-over-year in May by our numbers. Do you have any sense as to how retail has been post that? Has that strength continued whether sort of a World Cup buildup that may have fallen? Would you seem with respect to what retail sales look like on TVs and then we can get into some talk about 4K TV inventory and possibly what that could do, but what you are seeing right now?

Eric Musser

Sure. In general, we continue to see retail sales perform well and in line with our expectations. So, you mentioned the main data points. For June, for example, the sales were up 28% year-on-year, so very good metric there and so far the data that we have for July is also in line with our expectations. So, for the full year overall, we expect retail sales to be in line with all of our forecast and expectations and therefore we don’t really see any change or issue with the supply chain inventory. Now, you mentioned 4K TV, obviously it’s an important future trend. We are watching it very closely. We have probably been a little bit more conservative than some other analysts in terms of how quickly the impact maybe seen from that primarily because of where the current pricings are right now, but so far what we have seen in 2014 sales for 4K TV have probably been a little bit higher than what our expectations are. We are not concerned about any overbuild with 4K TV in an inventory perspective, but then for the most part our view is the full impact of 4K TV is probably in the 2015 and 2016 timeframe.

Ehud Gelblum - Citi

Mainly because of the pricing…

Eric Musser

Mainly because of pricing, we think that pricing has to get down probably about 1.5x standard HD, whereas now it’s probably still well above 2x, maybe approaching 3x.

Ehud Gelblum - Citi

Pricing. So, we are seeing as well, so in the demand for glass that you are seeing right now due to the fact that some OEMs are buying 4K TV glass sizes or do you think that the OEMs understand that they aren’t inventorying extra glass for a 4K TV cycle that may not happen for another year?

Eric Musser

Yes, we are concerned about excess inventorying of glass of sort of this perpetration for a 4K sort of quicker ramp or anything like that and no concerns right now about the supply chain inventory. I think we were at about 18 weeks in Q2 and our current forecast right now for Q3 is probably to slightly reduce that and exit the quarter somewhere around 17 weeks overall.

Ehud Gelblum - Citi

So, it sounds like after having dipped down to 14 weeks, 15 weeks a few years ago, inventory weeks of glass seem to be staying around the 17-week, 18-week and we seem to be comfortable that stock has done very well – company has done very well, inventory supply chain seem to be very clean, 17, 18 weeks seems to be like clearing level?

Eric Musser

That’s my perspective to everything you have summarized. I don’t know, Jim if you have a different view.

Jim Flaws

So, you may recall that a couple of years ago we did a big study. We thought we are on our way to being 15 to a sustained level and then as soon as we published that study immediately we seem to bounce up to the 17 to 18.

Ehud Gelblum - Citi

And I recall that study the answer was 14.5 weeks is the result of that study.

Jim Flaws

Fairly precise. One of the things we think is influencing this is the fact that panel prices have been relatively stable actually have ticked up a little bit over this year, but where we have seen in the past where people worry about carrying too much inventory, if they hear there is a big decline coming in panel prices and because by and large, we had such stability in panel prices now for well over a year. We think that gives people more comfort about carrying 17 to 18 weeks as opposed to the 15 weeks, but this is a tough one to forecast.

Ehud Gelblum - Citi

Right. Plasma TV, clearly plasmas are getting as a smaller percentage of total TV sales for sometime over the next 12 months that pretty much be discontinued entirely, do you see that as a tailwind that will help you over the next 12 months with respect to LCD TV demand?

Eric Musser

Well, yes, but only to a slight degree, because in our view there is probably about 6 million units of plasma TVs sold in 2014 and probably representing about 3% of the glass surface area. So as that discontinues as we go forward obviously that’s an enabler, but only to a limited degree that I mentioned.

Ehud Gelblum - Citi

They are larger TVs, so correct, so they disproportionately helped. One of the ways that you got your arms around some of the pricing issues in the glass market over the last couple of years was you introduced your fixed share contracts, right, talk to us about now couple of years into them that I think you launched them in the end of 2012, have they done what you expected them to do going forward? They have to get renewed I believe every year. Do you plan on renewing them, how do you – are there any changes to them? I think you can give us a sense as to how many of your customers today are under these fixed share contracts just to give a good stop on how they are doing?

Eric Musser

Yes. I think in general these stable share contracts that we have we have been very pleased with them. First and foremost, they have accomplished the primary intent that we had which was stable share, but in addition to that what you get with the stable share is the better ability than to plan our manufacturing assets and utilization and obviously that helps with our lead times as well as our manufacturing costs. So, overall we have been very pleased with them. Look, we have a range of contracts, some of them extends already past 2014, some of them are up for renewal in 2015, which can occur automatically unless one or the other party chooses to do otherwise. And then some of them are negotiated annually, so that we have a range of time horizons across the various customers. I don’t think I would like to specify how many customers are under those, but in general then I would say we are quite pleased with the contract.

Ehud Gelblum - Citi

Has the program changed from when they were first put in place for 2012? Has it expanded or have you changed the terms of the agreements as you have gotten experience with them and matured over the last couple of years or are the agreements that are in place today and that you are looking to put in place for 2015 largely the same as the ones that you put in place in 2012 when you first entered this?

Eric Musser

I think they are largely the same. Jim, I know you may want to comment on it, so that there is any sort of minor adjustments that we have made.

Jim Flaws

Really fundamentally the same type of contracts that worked very well.

Ehud Gelblum - Citi

Right. Have you seen any reaction from your competitors in Japan with respect to this contract that they have changed their behavior either better or worse as they have kind of reacted to this new industry structure that has been created?

Jim Flaws

We really haven’t seen anything that we could detect from our competitors will be directly associated with this contract. That’s really hard to judge. We did have the episode at the end of last year, where there was a major price correction at a customer. We don’t think it was related to these contracts. We think it was related to one of our competitors having a big mismatch between some of their customers. But it’s hard for us to tell whether these contracts have really influenced our competitors directly, but overall, the fact that we have been – that they have been renewed and are continuing and so far customers seem happy with it also I think says that it’s working for both parties.

Ehud Gelblum - Citi

Excellent. Let’s look it a little bit into the CPM, the SAP, the Samsung Corning business that you have integrated in. You told us from last earnings call that you are actually ahead of target on the synergies there. Can you walk us through some of the synergies that you have got clearly you got some excess capacity that was trapped in Korea and you can pick them out, but talk to us about the synergies that you have managed to find and where you stand with respect to what you thought you were and where you are finding the extra synergies?

Eric Musser

Right. So for those of you who are less familiar, Corning Precision Materials is the name of our new acquisition since the beginning of the year. It was previously Samsung Corning Precision and we bought out the entire interest in it. So, it’s now wholly owned operation. We got underway in Q1 with the integration of that effort into our business. And I would say we are very pleased with how that’s going so far. I think in every regard it has met or surpassed what our expectation was including the synergies that you mentioned. So, we are deriving the synergies from really all forms of cost, including those in the manufacturing cost sort of all the typical areas that you might expect as well as in operational costs from selling and administration and for our D&A. So, really, it’s the entire sweep of costs associated with CPM. And we are achieving the synergies as you mentioned quicker than we had expected and in fact we continue to expect that in the years ahead and probably even delivering what we thought would be the 2017 total value probably as early as 2016.

Ehud Gelblum - Citi

So, where are these extra synergies coming from and why have you beaten the targets?

Eric Musser

I think there were still a lot of unknowns even though we had a 50% interest in the venture and a lot of it came down to timing as well to in terms of sort of when you have started raw material and other procurement contracts, when those come due for renewal and when we can use the larger Corning buy to get to a better effect on those. So, that’s been one driver. So, the other driver though has been the utilization of the manufacturing assets. Obviously, we have acquired a large installed base of the most efficient, most productive assets in our system and we have been on a quarter-by-quarter basis now and continuing into the future as tanks reach their end-of-life in other operations, we have been migrating volume to these assets in Korea in realizing the advantage cost from those. And so that trend will continue over the next several years as other tanks reach their normal end-of-life and then we don’t rebuild those.

Ehud Gelblum - Citi

Why did it take you four years and now you are saying closer to three years to get synergies on a business like this, why can’t you do that much sooner?

Eric Musser

Well, again sort of the critical path or the limiting step, then, is sort of the expected tank life. So, we could obviously take down tanks elsewhere earlier, but of course, you would have a depreciation hit from that. So, what we are trying to manage through is sort of best overall net savings in our system and that’s why we have these tank transitions paced out over a multiple year period of time.

Ehud Gelblum - Citi

Right. One of the areas that I had understood that you could use some of these extra tanks was in Gorilla – was for Gorilla in that you had huge demand for Gorilla, but the joint venture with Samsung couldn’t produce Gorilla you could and so you have got access to these LCD tanks, so you could use them, are you converting many of these or some of these tanks at least to Gorilla and how has your new lower forecast for Gorilla impacted your ability to use those tanks and what you do with them with respect to the special material?

Eric Musser

Yes, we are converting use of the tanks to the Gorilla product line and that’s going just fine and delivering as we had expected. You mentioned a lower Gorilla forecast, so obviously we have got to pace that transition to the Gorilla forecast that we see ahead.

Ehud Gelblum - Citi

Okay. So let’s talk about that forecast, walk us through again what you talked about in the second quarter earnings call with respect to what you are seeing clearly, we saw from the outside iPad sales being lower, the Samsung tablet sales being lower in the first half of the year, what else you are seeing, what have you seen since then with respect to the opportunities for Gorilla in the second half of the year and next year?

Eric Musser

Jim, would you like to start.

Jim Flaws

So I think the big change that we have talked about in our quarter two earnings call and our outlook was a dramatic reduction in the amount of glass going to tablets. We had carried expectations, somewhat fueled by our customers’ forecast that tablets were going to grow stronger. We have probably should have reined that forecast in earlier than what we did. That is the biggest change statements that we have seen as the tablet sales, branded tablets had been much slower. Fundamentally we think we may end the year with no growth in branded tablet space and that’s obviously coming into this year we expected to see significant growth there. And obviously tablets are much bigger than phones are, so really has had big impact. So that is the biggest change statement we have had. And we are obviously at the mercy of our customers and whether they are going to ignite consumers desires to get a new tablet. One of the things we are learning about compared to phones is that tablets probably have a longer purchase cycle, whereas in phones you are commonly getting a new phone every two years. Now that we are coming up on four years of tablets being a very popular thing, it appears that purchase cycle for the consumers is actually much longer than what I think manufacturers originally anticipated. So we are factoring that into our forecast.

Ehud Gelblum - Citi

Tablets seem to be living in the netherworld between phones and PCs and notebooks and depending on who you ask in that continuum between the two tablets are starting to look a lot closer to especially if you ask guys like Intel closer to a smaller notebook than a larger phone and perhaps we are seeing a little bit that of that in your pricing cycle, you talked about the branded tablets being flat this year, the unbranded tablet world seems to be growing like that we have been doing very well, are there opportunities for Gorilla to penetrate that or are there economic reasons why that’s tougher or just the types of companies that make unbranded tablets, is that an opportunity in the market you can get into?

Eric Musser

I would think whether it’s unbranded tablets or whether it’s sort of lower end smartphones from sort of the China or other Asia OEMs, it is an area of focus for us as a company where our share position is not as high as where it is in the branded products. But it’s an area of focus and it’s one where we believe we have made quite a bit of improvement. I will speak with smartphones for example in China, it represents probably about one-third of the world market. And although the share of aluminosilicate glass is lower there than it is globally as well as our share of Gorilla in aluminosilicate has been lower than what it is globally. We have shown really measurable improvements over the last year in that market. So this year for example we expect those sales to be at least 2X what they were in…

Ehud Gelblum - Citi

This is China smartphone?

Eric Musser

China, yes.

Ehud Gelblum - Citi

So how about China tablet, is that an opportunity that you can get into and how do you break into that?

Eric Musser

Similar as well, but the price points for these tablets are really difficult right. And so trying to compete against soda lime glass in those applications is quite a challenge not just for us. So we have a number of opportunities underway right now where we are working with our supply chain in China to lower the overall cost to be able to deliver sort of a finished cover for a tablet or a smartphone at a lower cost or seeing some positive effects from that, but it remains a challenge.

Ehud Gelblum - Citi

Okay. Your competitors, your two main competitors in LCD glass in Japan have also come out with their own versions of cover glass, strengthened cover glass, are you seeing any impact from those products in the market?

Eric Musser

We haven’t really seen any measurable or material effects sort of along that competitive position from either of those two suppliers versus where we are in the branded market. And as I mentioned, they two are competing like us for China smartphones, China tablets as well too and we like how we are competing and winning there as well.

Ehud Gelblum - Citi

Okay. So, you don’t see much competition yet, any difference. It sounds like your competition continues to be soda lime glass or not putting cover glass on a device?

Eric Musser

Yes, yes, that’s right.

Ehud Gelblum - Citi

Okay. Let’s do a little bit of pie in the sky on Gorilla for a second. You talked about it getting into automotive and in cars over time I think also elevators and other areas. We saw the first car come out earlier this year. Unfortunately, it did not given out at the Analyst Day, it was a BMW i3 I believe or i8?

Jim Flaws

i8.

Ehud Gelblum - Citi

i8. That would have been a nice give away to give to people. So, I recommend that for next year, when we are – even in that car however, it was not a windshield, it was an interior piece of glass I believe. When are we going to see the first cars roll off the assembly line with Gorilla in some exterior piece of window, windshield, side window, something of that sort?

Eric Musser

Yes. We are very interested in this market for auto laminate and we think in general with some 5.5 billion to 6 billion square feet of total opportunity out there and we are working with major OEMs basically around the world, not just for an interior piece of glass, but a windscreens, side windows, sunroofs, moon roofs, and so forth as well as sort of interior touch panels for navigation systems, driver consoles all that sort of thing, but I think that there is many developments that are underway right now, but I think probably a couple of things really have to come together. One of them is that we have to work with our supply chain and auto laminators and so forth along with the ultimate OEM to really get a whole supply chain readiness in place to be able to deliver those types of product applications in the car in large volume. So, we are working on that right now again with many different dimensions in the supply chain.

Jim Flaws

So, could I amplify a little? We do expect to win a second car shortly and it would be an outside window. We can’t name the company, but my goal – you have heard me say this what is we need to get on an everyday car and everyday truck and I think that will be the demonstration of what that this really is a market for us and that’s really the primary focus for us is to get on an everyday vehicle and hopefully that we will achieve that within the next year.

Eric Musser

Right. And maybe just to amplify that comment just a little bit, so you all are aware that one of my businesses I am responsible for is our environmental business I just spoke about. So, even in the short number of months that I have been associated with this business, I have been working with a number of leading OEMs both auto and truck on the applications that Jim and I are speaking about.

Ehud Gelblum - Citi

So, when you say that you will win a car this year, does that mean you can buy the car this year or you win the design and the car won’t be out for purchase until 2015/16/17 because of long design cycles?

Eric Musser

‘15.

Ehud Gelblum - Citi

2015, we will start seeing and that will be an exterior car, but it doesn’t sound like it’s going to be an everyday car, it sounds like it’s going to be another exotic car.

Jim Flaws

It won’t be quite as exotic as the i8. The reason why we couldn’t give you one at the Analyst Day is they only allocated us one.

Ehud Gelblum - Citi

Who got that one?

Jim Flaws

Actually, our Chief Technology Officer.

Ehud Gelblum - Citi

It’s good to be the tech guy, okay.

Jim Flaws

We agree with your fundamental point which is that we are working towards OEMs with a more mass market introduction and that’s what we expect to deliver in the years ahead.

Ehud Gelblum - Citi

Putting a ribbon around it, Gorilla, pretty quickly with all these different piece of the puzzle that we are talking about, what’s the growth rate of Gorilla that we should be thinking about going forward, the market? Forget about your share and shift back and forth in inventory, but should the market be – is this a 10%, 15% grower or is it single-digits? How should we be looking at the cover glass market for you guys?

Jim Flaws

So, cover glass for consumer electronics putting aside the auto opportunity, we still think should be in the teens, but that is obviously we have to figure out what’s going to happen with tablets to achieve that. If tablets are absolutely flat, that will be hard to achieve. But we have got to figure out what the long-term growth for tablets going to be. So, that’s what we are thinking about in terms of the growth rate of this business.

Ehud Gelblum - Citi

Okay, great. Let’s move on to telecom. Fiber-to-the-home seems to be doing very well for you, so are DAS wireless solutions. What are the main drivers in telecom today? And are these cyclical or are there secular trends that you think could continue for number of years?

Eric Musser

I think maybe in both product applications fiber-to-the-home and distributed antenna systems, the drivers continue to be sort of consumers themselves demanding higher and higher bandwidth and then having applications that really spur that type of increased demand. So that’s one aspect. The second aspect is we have continued to be able to innovate in a way that reduces the overall upfront capital cost as well as ongoing operational costs. And then there is also still a fairly high amount of intensity between both public service providers or telcos as well as private companies, they are starting up networks are investing in data centers and networks and so forth. So in general I would say there is just really a number of factors that are really creating favorable conditions both now and into the future to drive both of those product applications.

Ehud Gelblum - Citi

Okay.

Eric Musser

If you look at distributed antenna systems for example in our view probably less than 10% of the large buildings, facilities, stadiums, arenas, etcetera have some form of indoor cellular capability and yet many of us as consumers expect that right and are demanding that and so that’s one of the reasons driving the advancement.

Ehud Gelblum - Citi

And where does that number goes less than 10% to today where does it go in five years?

Eric Musser

I don’t have a figure for the future, Jim I don’t if you have a view.

Jim Flaws

We just think it’s going to just keep growing at a very rapid pace as you know 16% of all actually it’s greater than that – cellular activity actually is inside of the buildings. It’s not us driving around in cards. You don’t need – and to get high bandwidth in many buildings you need to have it’s not just Super Bowl stadiums, you need to have more capacity in buildings, so that’s where we see high growth how fast it gets we don’t have a forecast yet.

Ehud Gelblum - Citi

Okay. Let’s move along quickly, so we can get some environmental questions as well. You laid out very nicely for us the growth drivers here, how again the secular versus cyclical issue, we got some regulatory reforms that are definitely changing the heavy duty truck market, is that something that is a five year cycle and this is the beginning of just continued growth for five years or we must see some ups and downs there have been many years in the past when we were looking for regulatory reforms to help you, they helped for the while an they have fallen off, is this something that we should now just dial in X% growth, you had 23% growth is that what we are seeing this now for the next five years?

Eric Musser

It’s difficult to project a specific point estimate for the next five years, but we think the underlying factors continue to support substantial growth. So what I mean by that is you have mentioned the regulations that I spoke about both in Europe and in China that are taking place and we will see a benefit of those for years going forward. In North America we have also seen a significant increase this year after two down years. So you are right there has been some cyclicality to the North America Class A truck build market, but all the indicators that we have right now show continued strength for that and is underpinning our near-term forecast for Q3 and the second half. I think that the underlying factors though still are going to drive demand growth which is sort of the continued demand for clean air, the continued tightening regulations that are in the roadmap with regulators even beyond what is implemented right now. So that creates for us for our existing products and innovations that we are currently working on.

Ehud Gelblum - Citi

Right, something that going against you perhaps is if we all start driving Teslas next year and electric cars, this might to be too small of an issue to really worry about or care about, but does that change the equation at all?

Eric Musser

If you look at a true electric vehicle, right there is no emission control product technology that we would supply into that. Hopefully, we will be selling lot of Gorilla glass into those vehicles to help them achieve lighter weight and more mileage efficiency. But the majority of vehicles that we see going forward and more hybrid vehicles and so they may not have as large of a gasoline engine, but they do have a gasoline engine and that requires the emission controls and that requires our product and gives us opportunity to continue into selling those.

Ehud Gelblum - Citi

Okay. Let’s quickly move in the time we have left into life sciences and then some overall strategy types of question. On life sciences as you said you have been growing through M&A and you have seen large revenue growth there, as you purchase each one these different pieces of the pie, are you seeing – clearly you are seeing some cost synergies, are you seeing revenue synergies, is there a take up with each one does your sales when you buy one these businesses increase because of the less the piece of portfolio that you are selling extend possibly to same customer side?

Eric Musser

That’s right we do – we have been very pleased with the series of four acquisitions that we have completed in life sciences since 2009. We have been able to generate not just cost synergies from those, but also of revenue synergies along the lines that you described. We have been able to add product categories and brands to what we sell into our existing channels, into our existing regions, but also to grow strength in other regions and other channels that we did not have. Well, in general what I would say is that we have been able to grow at a rate much faster than our competitors in the life science market over this period of time have grown sales over 20%. So, I can’t break it down necessarily into how much of it is direct from acquisition synergy, because we also have a component of growth in there from our base business as well as from our new innovations, all three of them complementing the overall growth rate.

Ehud Gelblum - Citi

So, should we take this to mean that the M&A strategy will continue and we should continue to see the high hundreds of millions of dollars worth of acquisitions a year?

Eric Musser

Well, we won’t comment on the size of the acquisitions, but I will comment it is our intent and we are continuing to look for opportunities that fit sort of our capabilities in markets as well as growing and augmenting those. So, we are looking for opportunities and we would expect to continue M&A in life science.

Ehud Gelblum - Citi

And is that the main area that we should see M&A in, that’s what you have basically been doing so far, but of your categories, life sciences is where we should be seeing the M&A, correct?

Eric Musser

Not just in life science. We continue to look for opportunities in our optical communication space as well as in a number of our emerging innovations. So, as I mentioned, we are working with various supply chain partners to look at how we can augment auto laminates right for wider deployment of Gorilla and mass-market vehicles and so forth. And I don’t know that, that will include any M&A, but we remain open to all possibilities. So, it is our intent as a company overall to continue our pursuit of M&A. Jim, I don’t know if there is anything you would like to add to that?

Jim Flaws

No, I think those are the areas we are very interested in.

Ehud Gelblum - Citi

Okay. One last thing I want to hit a year and a half ago or so, you switched the company to a core earning form of reporting, where you have fixed the yen to dollar ratio at 93 yen to the dollar, which you have done to some great hedges that you have got as the yen went flying past 93 and went into 100 plus. As hedges rolled out over or about to roll over and you have created a forward contract at 99, you haven’t told us yet what you are going to do? The yen was hanging out around 101, 102, it’s now back up to 105 to the dollar, what are your thoughts, when are we going to get an update as to what your plans are as to how you are going to report on the core earnings basis and what are your thinking your early thoughts in terms of what you are going to do next, now that the hedges at 93 are going to roll over, roll off?

Eric Musser

Well, what we would like to do is to be able to give sort of a forward-looking guidance just sometime around with our Q3 earnings. And ideally, we would like to be able to state that limit and use that for a 3-year period of time. So, that’s what our current thinking is right now, but we haven’t made up any final conclusions or determinations over what that rate might be. Jim, would you like to elaborate?

Jim Flaws

Yes, I think that’s what we are intending to do. Obviously, the majority of our hedges for ‘15, ‘16 and ‘17 or now at 99 we have some below 99. We were a little surprised with the sudden spurt to 105 over the last couple of days. I am wondering if you have a forecast for it.

Ehud Gelblum - Citi

I wish I did. Would you ever entertain just taking at this point taking the core earnings off and letting it float?

Jim Flaws

I would say we think core earnings has been well-received by most investors for helping to understand the business. It’s not that we don’t kind of show you exactly the movements on a GAAP basis, but by and large the feedback from investors is having a core earnings rate, explain to people what happens and earlier this year as the yen was averaging around 101, people clearly understand how much the economic impact was to us, but I think right now we would say keeping core earnings was really our strategy certainly for the next three years.

Ehud Gelblum - Citi

It definitely serves to make our models much more complicated. So, for that, I thank you. Eric, Jim, thanks for being with us today. I appreciate it.

Eric Musser

Yes, thanks so much.

Jim Flaws

Thanks everyone.

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